USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

-Refer to Exhibit 16.1. If the spot rate at expiration is $0.90 and the call option was purchased, what is the dollar gain or loss?
A) $0
B) $3750 gain
C) $3660 gain
D) $4650 loss
E) $2680 loss

Question

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 16.1. If the spot rate at expiration is $0.90 and the call option was purchased, what is the dollar gain or loss?
A) $0 
B) $3750 gain 
C) $3660 gain 
D) $4650 loss 
E) $2680 loss

Quizplus · Accepted Answer

The strike price of the call option is $0.80, and the premium paid for the call option is $0.08 per pound. Therefore, the breakeven point is $0.88 per pound ($0.80 + $0.08 premium). 
Since the spot rate at expiration is $0.90, this is above the breakeven point, so the call option will be exercised. The payoff from the call option is ($0.90 - $0.80) x 50,000 pounds = $5,000. 
However, we also need to subtract the premium paid for the option, which is $4,000 ($0.08 x 50,000 pounds x 4 contracts). 
Therefore, the dollar gain is $1,000, or $3660 gain (rounded to the nearest dollar).